Are longer CDs taxed at a different rate?

By Sabrina Karl

If you’ve ever invested money in stocks or mutual funds, you’re likely aware that capital gains (and losses) come in two flavors: short-term and long-term. And the time you notice this is usually during tax season, since the two types are taxed differently.

But what if you’ve invested some of your savings in safer certificates of deposit? CDs come in short and long terms, and everything in between, so do their tax rates vary?

The answer lies in how CD returns are classified. Unlike stocks and mutual funds, which grow through dividends and price appreciation, or capital gains, what you earn on CDs is interest income. And when it comes to interest income on your tax return, the IRS employs a “one size fits all” policy.

That means it makes no difference whether your earnings are from a 6-month certificate or a 6-year certificate, or even a savings or money market account. Interest income is interest income, period.

You may also wonder when CD earnings become a taxable event. Does it depend on when you cash out the CD or when it matures? Again the answer is no, as certificate earnings become taxable whenever the bank or credit union applies the interest — usually monthly or quarterly — regardless of when you withdraw it.

One exception is CDs opened within an IRA. Because the same rules apply to all IRA investments, interest earned on retirement CDs is not taxable until the funds are dispersed post-retirement.

Whether you own one certificate or a portfolio of dozens, the tax implications of CDs are straightforward, and unfazed by any attempt to strategize term lengths. So invest in whatever CDs make the best sense for you, and know that your bank will report the interest income lump sum in time for tax seasons.

Does the amount of my CD deposit affect my rate?

If you’re getting ready to sock savings away in a certificate of deposit, you may know how much you want to deposit. But as you shop rates, you might discover deposit minimums and rate tiers influencing your decision.

Most CDs stipulate a minimum deposit. That’s the smallest amount you can invest to open a particular CD. Fortunately for modest savers, many certificates have entry points as low as $1,000 or $500. Others even lower the bar to no minimum at all.

But that’s not always the case. Sometimes depositing more funds will earn you a better rate, and it happens one of two ways.

Some certificates simply have hefty minimum thresholds, requiring a deposit of $5,000 or $10,000. And there are also “jumbo” CDs requiring $25,000 or even $50,000 in a single certificate. These larger CDs aren’t guaranteed to pay better than lower-minimum options, but often they do.

Then there are banks and credit unions that offer CD rate tiers. Here, for example, you may earn one rate on deposits up to $4,999, then a slightly higher rate above $5,000, and perhaps a third rate if you deposit $25,000 or more.

These options may lead you to stretch a bit on your deposit in order to score a higher rate, moving for instance from an initially planned $20,000 up to $25,000 to qualify for a well-paying jumbo certificate.

It may also impact whether you open one vs. multiple certificates. The strategy of splitting your savings into more than one CD — to lessen the penalty hit if you need to cash out some of your savings early, but not all of it — is a smart one. But if it prevents you from earning a higher rate with a single, larger certificate, you may want to reconsider.

Can CDs boost my credit score or help my mortgage application?

By Sabrina Karl

Certificates of deposit are great for stashing away money reserved for buying a home, since their withdrawal restrictions make them harder to access than other bank accounts. But can CDs actually help you qualify for a mortgage? And how do they impact your credit score?

Let’s start with your credit report. Here, the answer is that CDs have no bearing on how good you look to credit rating agencies. That’s because credit scores generally only factor in credit that’s been extended — in other words, your loans, debts and credit lines.

In contrast, bank accounts and investments are savings, not debt obligations, and therefore don’t fall within a credit report’s scope. So no matter how much money you hold in deposit at a bank, whether in CDs or other accounts, it won’t appear in your credit report or factor into your score.

The only exception is for individuals who use a CD as collateral to take out a personal loan. Here, credit has been extended, so the personal loan will make it onto your credit report.

As for how CDs influence mortgage lender decisions, any funds held in certificates can certainly count toward your down payment. But whether your down payment funds come from savings, money market, checking or CD accounts really doesn’t matter. Cash in any of these is calculated equally.

Because CDs are not as liquid as savings accounts, though, the lender may require you to spell out when you’ll cash in the certificates, and perhaps how much you’ll surrender in any early withdrawal penalties.

Other than that, however, owning CDs will not sway the lender to be any more or less favorable to you, making their best value that of securely holding your funds with reduced temptation until you’re ready to apply them to your new home.

How much higher will the Fed raise rates?

By Sabrina Karl

For U.S. savers, what a difference three years can make. Back in December 2015, the Federal Reserve hiked interest rates for the first time since the Great Recession in 2008, finally taking an upward step out of a seven-year valley of near-zero rates.

Fast forward to this December, and the Fed has now made eight additional increases, announcing the latest one last week. The Federal Funds Target Rate now sits 2.25 percentage points above its 2015 level.

This matters to cash savers because savings, money market and certificate of deposit rates are correlated with the Fed’s rate. While any single rate bump might not move the needle across the entire banking industry, this three-year period of nine hikes has driven up rates throughout the deposit accounts market.

But is the Fed finished, or will it hike rates higher still? There is never a reliable crystal ball for this question, as the Fed’s rate-setting committee holds sole responsibility for that decision, and privately meets to determine a verdict every 6-8 weeks. But with each new decision, they submit a written projection for the future, and currently, they’re signaling that we may see two more bumps in 2019.

This information matters particularly to CD savers, since they lock into a rate for the future. As a result, opening a new CD right before a rate hike is announced can be disappointing. On the other hand, savings and money market funds can spontaneously benefit from any number of increases, but at the expense of lower-than-CD rates.

The Fed’s forecast last week of two more hikes in 2019 is a slight downgrade from its previous prediction of three increases next year. But still it suggests that the rising tide cash savers have been enjoying may still have some swell in it.

To score the best CD rates, watch for limited-time promotions

By Sabrina Karl

When you’re looking to sock money away in a certificate of deposit, the No. 1 way to maximize your earnings is to do your homework and shop around. That’s because today’s internet-connected world enables you to search the rates of dozens of banks and credit unions offering CDs nationally or in your area.

As you plot out what you’d like to invest in CDs and for what duration, you’ll likely think of one year, two years, three years, etc. And what you find may fall into those tidy increments. But being flexible will open you up to opportunities that could boost your earnings.

Flexibility allows you to capitalize on promotional CDs that may have unconventional terms. Banks and credit unions tend to have a standard menu of traditional-duration CDs always on tap. But many will offer a special certificate from time to time, one with a much better rate and perhaps an unusual term. It’s not uncommon to see promotions for 5-month, 17-month or 21-month CDs.

Being open to odd-term CDs and adjusting your plan based on what you unearth will help you build a CD portfolio that may not look like what you originally plotted out, but will maximize what you earn from your CD investments.

Another kind of flexibility is also useful, and that’s flexibility of timing. Promotional CDs tend to pop up without warning, and are often available for a limited time. So patiently shopping over time, instead of on a single day, will lead you to more special offers. Funds flexibility will then enable you to jump on a great deal when you find one.

The most lucrative CD portfolios are seldom predictable, perfectly tidy collections. But for savers willing to shop over time and move when they turn up a winner, bottom lines are rewarded.

Are CDs guaranteed?

By Sabrina Karl

When it comes to earning a return on your money, most options trade risk for return. The greater the risk you’re willing to accept, the more you can potentially earn.

Certificates of deposit are no exception, except in reverse: in exchange for a modest, capped return, your risk is almost nil.

CDs are virtually risk-free in two ways. First, they carry an explicit, unmovable interest rate. You know before depositing funds what rate the bank or credit union has agreed to pay you, and for what period of time you’re both committed.

The only exceptions are CDs with names like “raise your rate”. These special certificates allow you to improve your rate during the CD’s term, at your direction. But they don’t include any reciprocal option for the financial institution to do the rate changing.

But what if the bank with your CD goes under? Even here, you’re almost always protected. The vast majority of banks are FDIC-insured, as are most credit unions, with NCUA insurance. These two federal programs provide an important safety net to consumers, keeping them whole even in the case of a bank failure.

Deposit insurance covers up to $250,000 held by one individual at a single bank. So if you have more than that in deposit accounts, you’ll want to spread it out across multiple institutions.

A bank failure does present the only real risk of a CD, since you’ll likely be offered the choice of cashing out your CD, or continuing at an almost certainly lower rate. Your risk, therefore, is only the possible loss of earning the CD’s advertised rate for the full term.

An infinitesimal number of banks fail these days, so for savers wanting to invest some of their funds in stable, fixed-return vehicles, there is hardly a safer option than CDs.

What to look for when shopping for CDs

By Sabrina Karl

You’ve heard it here before: To maximize what you can earn from CDs, shop around. But what are the most important factors to consider?

Traditionally, savers opened certificates of deposit at the local bank where they held their checking and savings accounts. But with the advent of the internet, plus the growth of credit unions, hundreds of options exist for CD savers no matter where you live, meaning the competition for your deposits has heated up.

Obviously, the primary factor you’ll want to consider is the rate. True, a higher rate means you’ll earn more. But the CD’s term is of course critical as well. Longer CDs pay a higher rate, but you’ll be locked in for longer. 

When rates are rising, as they have been for the last three years, shorter-term certificates can be appealing until rates stabilize. But this needs to be balanced with the knowledge that rates are never fully predictable. Though the Federal Reserve is forecasting more increases, nothing is reliable until it actually occurs.

Two other considerations can help you capitalize on potential rate increases. If you’ll be investing in a CD ladder, where you buy multiple certificates of varying terms, finding one institution that offers competitive rates across its whole array of CD terms can greatly simplify matters by allowing you to hold the whole ladder at one bank. 

Additionally, no CD comparison is complete without checking early withdrawal penalties. If you opt to cash out early, the penalty for doing so varies widely. So if you’re considering longer CDs, choosing one with the least onerous penalty is smart.

Shopping for your best CD isn’t especially complicated. What’s important is investing some time to evaluate the offerings and check the fine print, as it will almost always translate into more earnings in your pocket.

What happens to a forgotten CD?

By Sabrina Karl

Though some might find it hard to imagine, money socked away in CDs occasionally falls off the radar. Off the saver’s radar, that is. But banks don’t forget, and though you won’t lose your money, you may not be able to claim it as easily as you’d like.

When a certificate’s maturity date is soon approaching, your bank will remind you of the upcoming date, along with instructions for specifying what you want done with the funds. But if you neglect to provide instructions, most institutions will roll the money into a new CD of the same term. So if your maturing certificate had a five-year term, the bank will move the funds into a new five-year CD.

If you miss your maturity date, because you left mail unopened or you changed address and didn’t receive the notice, there is usually a 10-day grace period during which you can still direct the funds. But if it’s been months or years, you’ll have to contact the bank to inquire where they moved your money.

The good news is that the funds are still yours. But once they’ve been rolled into a new CD, you face two disadvantages. First, the interest rate on the new CD is not likely to be competitive, so you’ve given up your chance to earn more with a better certificate. Second, you’ll be forced to either wait until the new CD matures, or pay an early withdrawal penalty. These penalties vary widely across banks, but can be steep.

Claiming a forgotten CD isn’t complicated, but you’ll almost certainly reduce your earnings by having neglected to act at maturity. So avoid penalties and lost earnings by putting maturity dates on your calendar, opening all financial mail promptly, and keeping your address up to date with financial institutions.

What Happens to My Savings or CD If My Bank Fails?

By Sabrina Karl

The chances of a bank failure are extremely slim these days. And the odds of your bank being seized are even more miniscule. Still, if you wonder what would happen to your deposits should that unlikely event take place, it’s easy to set your mind at ease. 

First, let’s look at the narrow odds of this happening. True, in the five years following the 2008 financial crisis, 465 banks were shuttered. But as we know, those were historically unique circumstances. In contrast, annual bank failures have numbered in only the single digits for the past three years, and so far in 2018, not a single bank has been closed by the Fed. 

With the U.S. having almost 8,000 operating banks, if eight closed in a year, that would represent just one-tenth of one percent, or a 99.9 percent “safe” rate.

But what happens to your funds if you do bank at a failed institution? The good news is that, assuming the bank is FDIC insured (the vast majority are) and you don’t hold more than $250,000 at that bank, the federal government ensures will not lose your funds or any earned interest.

That said, your deposit terms will likely change, as dictated by the bank that took over your bank. This comes into play most significantly with CDs, where the new bank is likely to offer you the choice of exiting the CD with no penalty, or continuing at a new (likely lower) interest rate.

All this means that your biggest risk will be losing an attractive rate, if you were receiving one. But since you’ll be allowed to exit your CD, and since savings, checking and money market funds can be withdrawn at any time, you’re free to shop around and take your money where you can earn more.

Why smart CD savers check the Fed’s calendar

By Sabrina Karl

Once again, the Federal Reserve has raised interest rates, the third time it has done so this year. Though no one can reliably predict how often the Fed will make increases, smart CD savers will note the Fed’s calendar.

The Fed’s rate-making body is called the Federal Open Market Committee, or FOMC, and it meets on a publicly announced schedule of every 6-8 weeks (google “FOMC calendar” for the dates). Upon the conclusion of each meeting, the committee announces its rate decision to the press

The reason this matters to CD savers is because an increase by the Fed generally ripples out to increases by banks and credit unions on their savings and CD accounts. While it won’t happen instantly, the general deposits market will move upwards.

If you have a savings or money market account, you won’t need to do anything to benefit from increases your institution makes. But with CDs, the calculus is different, since you’ll be locking in one rate for the duration of the CD’s term.

That’s why it’s smart to check the FOMC calendar to avoid locking into a new certificate right before a possible rate hike, sticking you with a lower rate than you might be able to earn if you hold of until the next FOMC decision.
From December 2008 until December 2015, the FOMC held its rate to near zero to stimulate an economic recovery after the financial crisis, and bank deposit rates tanked to historic lows. Since then, the Fed has raised rates once per year in 2015 and 2016, and now three times each in 2017 and 2018.

It’s always uncertain what the committee will decide at its future meetings, but the savvy saver knows it’s better to lock in new CD rates after, and never before, a Fed rate hike.

Why it matters whether your bank is FDIC-insured

By Sabrina Karl

Bank failures sound scary. All of a sudden, the federal bank regulators rush in unannounced and shut the operation down. And whether you hold accounts at that bank or not, you’ll find out at the same time as everyone else – after the fact.

But while that may sound scary, for the vast majority of a bank’s depositors, there really is no significant danger. That’s because the U.S. has a sophisticated, well-run insurance system called the FDIC, which protects your funds should a bank fail.

The Federal Deposit Insurance Corporation is a government entity started during the Great Depression to restore confidence in the U.S. banking system. And confidence and trust is exactly the sense it should bring you today. Because unless you have a very large sum deposited at a single bank, FDIC insurance has your back.

The way it works is that all deposits up to $250,000 held by a single individual at a single FDIC-insured bank will be reimbursed by the government if the bank is seized. But even if you have more than that amount held in bank accounts, you can still protect yourself. If you’re married, you can hold up to $250,000 in each spouse’s name, for $500,000 in total coverage. Or, you can split your deposits among more than one bank, so you don’t exceed $250,00 with any one institution.

Of course, this works if you hold your deposits at an FDIC-insured bank, which is most of them. However, banks do exist that provide private deposit insurance instead of FDIC coverage. It’s possible you’ll be just as safe with these privately insured banks, but many savers feel more comfortable sticking to government-backed insurance.

Fortunately, it’s easy to check if a bank is federally insured. Just check the bank’s materials or website for the FDIC logo.

Is a “raise your rate” CD a good choice?

By Sabrina Karl

Since CD savers generally focus on maximizing their rate of return, special certificates with a name like “Raise Your Rate” are going to grab some attention. But as with all things surrounding CD selection, you’ll be well served by shopping around and then ensuring you understand any CD’s terms before opening it.

A “raise your rate” CD, sometimes called a “bump-up CD”, offers savers a special option to increase their interest rate during the maturity period. Usually you’ll be afforded one rate bump, although some longer CDs allow for two increases.

The bank will also spell out the rules for what new rate you can capture. Generally, you’ll be allowed to take advantage of the bank’s current rate on that same CD term.

It sounds ideal, at least in periods when interest rates are on the rise. But there are still good reasons you may prefer a standard CD.

First and foremost is the cardinal rule of always shopping around when choosing a CD. Rates across banks and credit unions vary widely, especially as online access to institutions outside your community grows. So even though you can boost the rate later, your rate today still needs to be competitive compared to other CDs.

Second, beware that you can only capture a new, better rate from the same exact term as your current CD. If your original CD is an odd term, or the bank tends to release its best rates on promotional odd-term certificates, you may never have a chance to capitalize on a rate increase.

If you’ve done your research and a particular “raise your rate” CD still seems like a good buy, it certainly offers a nice perk during these days of rising interest rates. Just don’t go in without that all-important step of shopping around.

Try the CD splitting strategy to reduce your risk

By Sabrina Karl

It’s a simple contract: Deposit money in a certificate of deposit and leave it untouched for a fixed period, and the bank will pay you a higher interest rate than you’d earn from a savings account. Break the contract by removing the funds too soon and you’ll pay an early withdrawal penalty.

For those feeling certain they won’t need their funds during the CD period, the risk is inconsequential. But if you’re not quite as confident, or you’re willing to accept a slight administrative burden in exchange for minimizing any earnings impact should you need to “break” your CD early, a splitting strategy can be smart.

Splitting CDs simply means opening a number of smaller CDs rather than a single certificate. Say you’ll be investing $20,000. Instead of opening one $20,000 certificate, you can opt to open two at $10,000 each, or four at $5,000 each, or even 10 at $2,000 each.

The advantage is simple. If you unexpectedly need to access some, but not all, of your funds, you can break just one or two CDs (or however many you need) instead of the whole lump sum. This limits your penalty to what you actually withdraw, leaving earnings on the rest unscathed.

Since most CDs are fee-free, there’s no added cost to opening multiple certificates. You will, however, incur more paperwork since each CD will receive its own statement. In these days of electronic statements, however, it’s a minor trade-off.

You’ll also want to check a bank’s minimum deposit requirements. Though many offer CDs with minimums of $1,000 or even $500, some require $10,000 or more. So check terms carefully as you shop around.

CDs are a great way to maximize earnings on your unneeded cash, and by splitting certificates, you can minimize your risk at the same time.

Can you invest IRA funds in a CD? And should you?

By Sabrina Karl

Certificates of deposit can be a great tool for saving toward a short-term goal, like building up a house down payment or stashing money for a big project or dream vacation. But what about retirement? Do CDs have a place in saving for your golden years?

The first question is whether CDs are an allowable retirement investment, and the answer is yes. When you open an Individual Retirement Account, or IRA, that account is simply a container, which can hold most types of investments, from bank deposits like CDs to stocks and bonds.

Opening an IRA CD is hardly different than opening a regular CD. At most banks and credit unions, all the CDs in their regular menu are equally available in an IRA. The difference isn’t usually in the CD itself, but simply in the account where you hold it.

Occasionally, however, an institution will promote a specific IRA CD offer. These are often longer-term certificates, which typically come with a more favorable rate.

But are retirement CDs a good idea? It’s true that CDs are extremely safe and entirely predictable, so they’re well-suited well to savers who have almost no risk tolerance or a strong aversion to investing in stocks and bonds.

But since a CD’s fixed rate of return generally lags these other investments over the long term – and usually significantly – investing your IRA funds in a CD will earn you far less over time. And in order to grow your nest egg sufficiently to fund your retirement years, the more substantial gains earned in the stock market are likely to be necessary.

That said, for savers who are very close to retirement, or who wish to hold a portion of their retirement savings outside the stock market, IRA CDs are indeed safe and reliable.

Should I open a no-penalty CD?

By Sabrina Karl

Certificates of deposit are often touted as a way to earn money on your savings with virtually no risk. In terms of your principal staying intact, that’s generally true. But CDs do carry the risk of forfeiting some earnings should you cash out early. So why not invest in no-penalty CDs instead?

If you’re thinking that something that sounds too good to be true probably isn’t, you’re on the right track. No-penalty CDs aren’t a swindle, though. They’re legitimate products, offered by many reputable institutions. But though they might be smart for a particular type of saver, for most of us they leave too much money on the table.

No-penalty CDs are exactly what their name suggests: a certificate that imposes no early withdrawal penalty if you cash the CD out before its maturity date.

However, that withdrawal flexibility comes at the expense of a much lower interest rate. It’s as simple as this: If you want to maximize your earnings, you’ll need to commit to a full term, or pay the penalty if you break the contract. But if you opt to avoid penalties, the bank will pay you less interest.

The lower rate can be significant, too, to the point that you can generally find an online savings account that pays as much or more, with almost no withdrawal restrictions. So for most, it’s smarter to open a high-yield savings account if you can’t commit to a full CD term.

One scenario where a no-penalty CD can make good sense is for savers who feel they lack the discipline to keep their savings untouched. Though a no-penalty CD still allows access, it’s not as simple or quick as draining a savings account. And that added procedural obstacle might be just enough to keep them from tapping their savings.

Follow this checklist before locking into a CD

By Sabrina Karl

Although certificates of deposit are among the safest saving vehicles, not all are created equally. Indeed, since their very nature requires committing funds to sit untouched for an extended period, you’ll want to choose wisely before signing on the dotted line.

The first criteria you’ll want to consider is the interest rate. How much institutions pay varies widely in general, and additionally, many banks and credit unions offer limited-time promotional CDs. So anytime you’re in the market for a new CD, it’s worth searching the current top rates for your chosen term to create a short list of candidates.

The next checkbox is determining whether each institution is federally insured, by the FDIC (for banks) or the NCUA (for credit unions). Although you may feel comfortable opening a certificate with a privately insured institution, most savers opt to stick to accounts insured by the U.S. government.

With your list whittled to top-rate CDs from federally insured institutions, it’s time to check early withdrawal penalties. The amount the bank or credit union will charge if you cash out early ranges from completely reasonable to downright exorbitant. Avoid any CD where the penalty could eat into your principal, and then check which certificates will hit you with the lowest fee should you withdraw the money early.

These three criteria should lead you to a few great CDs. But if you’re still torn between otherwise-equal certificates, you can check their compounding periods (the more frequent the compounding, the more you’ll earn), or how customer-friendly their website is. Calling to ask questions can also give you a sense of their customer service.

The world of CD options is immense, but following the first three steps of this checklist will lead you a certificate that pays well while exposing you to very little risk.

How safe are my bank deposits?

By Sabrina Karl

For anyone stashing money in savings, nothing beats the safety of depositing it in the bank. In fact, with a small amount of homework, you can ensure that what you sock away will earn interest virtually risk-free.

The key to holding risk at near-zero is two-fold. First, the financial institution you choose matters. Banks insured by the FDIC and credit unions with NCUA insurance will protect you if the institution fails, is seized, or otherwise ceases to operate. So if an FDIC bank goes under, the U.S. government will return your funds in full.

Fortunately, the vast majority of institutions carry federal insurance, as evidenced by an FDIC or NCUA logo on their website and print materials. But it’s important to verify, as a small minority of institutions instead carry private insurance. Though some argue this equally protects you, most contend that no private insurer is as reliable as the federal government.

For those with substantial savings, it’s also important to consider how much you’re depositing. That’s because the FDIC and NCUA insure up to $250,000 for any one depositor at any one institution. If your savings fall below this threshold, you can ignore this. But note that all funds you’ve deposited with an institution – no matter the number of accounts – will apply towards the $250,000 limit.

So what to do if you have more than that on deposit? Fortunately, it’s as simple as diversifying across multiple banks or credit unions. As long as you stay below $250,000 per institution, your deposits will be fully insured.

Money deposited in a bank or credit union won’t earn as much as you might be able to in the stock market, but achieving a steady return with no risk to keep you up at night can be a worthwhile trade-off.

What is a step-up or rising rate CD?

By Sabrina Karl

Certificates of deposit are generally pretty straightforward: You choose a term and the bank pays you a fixed interest rate as long as you keep your funds there until maturity.

But some banks will throw a specialty CD or two onto their menu. One is the step-up CD, and its name can sometimes confuse. So let’s dig into what step-up certificates are, and what they’re not.

Step-up and rising rate CDs are usually the same thing. Both pay pre-established interest rates that increase at intervals throughout the term. For instance, a five-year step-up CD may pay 0.5% in Year 1, then 1.0% in Year 2, and so forth until it pays 2.5% in Year 5.

That means your true earnings are a blended rate that averages the various tiers. In the example above, the CD would pay an actual rate of 1.5% over five years.

Of course, if you cash out early on a step-up CD, not only will you be hit with an early withdrawal fee, but you’ll miss out on the higher rates you would have earned in later years.

Shopper beware that there are also bump-up and raise-your-rate CDs. With these, you can choose to raise your CD’s APY to the bank’s current (presumably higher) rate, usually once or twice during the term.

Also note that some banks have begun interchanging these terms. So while the definitions above are traditionally true, you may see a CD marketed as a step-up when actually it’s a bump-up.

Step-up CDs are typically advertised with their highest rate highlighted, so be sure to read the fine print on what the blended rate will be. It’s likely you can earn more by shopping diligently among the fixed-rate certificates. In any case, be sure you understand exactly what it is you’re looking at.

Opening savings and CD accounts for children

By Sabrina Karl

For parents looking to help their children financially, custodial accounts provide the child a gift for the future while parents save on taxes today.

Custodial accounts are held in the name of a minor but are legally managed by an adult, typically a parent or grandparent. Deposits can be made into the account, interest is earned, and the custodian retains control until the child reaches the age of majority.

The advantage for parents is that special tax rules apply, allowing up to $1,000 in earnings per year to go untaxed and a second $1,000 to be taxed at the child’s rate. Only earnings above $2,000 will find their way onto the parent’s tax return.

Among the most common custodial accounts are savings and CD accounts at a bank or credit union. With these, parents can make a lump-sum gift or periodic deposits and the principal will accrue interest modestly but with almost risk-free safety.

Opening such an account is not much more difficult than opening one for yourself, and almost all banks and credit unions offer them. Just note that you’ll need to provide personal information and a social security number for both the child and the custodian.

You’ll also need to decide whether to open an UGMA (Uniform Gift to Minors Act) account or an UTMA (Uniform Transfer to Minors Act). UGMAs can hold deposit and brokerage assets and generally transfer to the child at age 18. UTMAs, meanwhile, can also hold assets such as real estate and typically remain custodial until age 21.

As always, shopping for a top rate is smart when opening a custodial savings or CD account. Once you’ve chosen a financial institution, their representatives can answer your questions on the age of majority in your state and which account will suit your child best.

What is a jumbo CD, and should I open one?

By Sabrina Karl

Anytime you shop around for CDs, you’ll notice that, in addition to their menu of standard options, some banks and credit unions also offer an array of jumbo certificates. What are these products and do they follow different rules than regular CDs?

As you can guess, a jumbo CD simply requires a much larger deposit than a standard CD. Traditionally, the threshold for jumbo CDs has been $100,000. But with no formal rules on the minimum, some financial institutions have taken marketing liberties to apply the term to $50,000 or even $25,000 CDs.

Also historically, jumbo CDs paid higher rates than standard CDs. But ever since deposit rates plummeted and then stagnated after the Great Recession, the spread between standard and jumbo rates has greatly compressed, to the point that jumbo CDs generally pay only a tiny fraction more than regular certificates.

Everything else about jumbo CDs works the same as standard CDs. A fixed interest rate and maturity term are specified at the outset, and the account must stay funded for the full duration. If cashed out early, a penalty will be applied, and whether this is the same as the penalty for regular CDs will depend on the bank.

So if you have a large sum to save in a deposit account, should you open a jumbo CD?

As always, your best bet is to simply shop for the highest rate you can earn, at an institution you feel comfortable with, for the amount you want to invest. Whether your top find is a jumbo CD or a standard one really makes no difference, since these are just marketing names.

In fact, you may be able to maximize your return and your flexibility (should you need the cash early) by opening multiple smaller CDs instead of one large certificate.